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The first half of 2024 is over, and wouldn’t you know it, we are looking at massive stock divergence. What does that mean exactly? Let’s look at the tape and see the results.

The SPX 500 is sporting a strong gain for the first half of the year – up 14%. The Nasdaq performed even better – up 17%. These results are coming off a stellar 2023 and fly in the face of higher-for-longer rhetoric from the Federal Reserve, higher energy prices, and a slowing economy (Q1 2024 vs Q4 2023). All that said, technology companies led the charge for both of those indices.

Meanwhile, the Dow Industrials is sporting a good but not great result; it’s up a modest 3.8%. That is comparable to the annual return on a 10-year bond when you include dividends. But for many investors with an insatiable appetite for strong returns, that is not good enough. Of course, the industrials have Apple AAPL (a top performer) but not NVIDIA NVDA (at least not yet).

So let’s talk about the big divergence between small caps and large caps. The proxy for the small caps is the Russell 2000, a large index of stocks made up of names from several business groups and categories. When rates are elevated, small cap stocks struggle. But when rates are low or are coming down, the IWM (ETF for Russell 2K) often performs well and even leads the other indices.

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But that did not happen the first half of the year. Instead, the IWM returned an anemic 1%. Take inflation into account and the return is negative. As an alternative to the IWM, you would have made more money in a money market or high-yield account.

So what might we expect for the second half of 2024, which kicks off this coming week?

I think the small caps will rally in the second half of the year and play catch up to the large caps. The first half of the year was all about NVIDIA and technology. The second half will be about housing, retail, and banks/financials –if rates glide lower.

Those seeking some value might find it in small caps relative to large caps, which now boast a very high multiple. At nearly 25x earnings, the SPX 500 is somewhat risky if interest rates do not decline much the rest of the year. The IWM is not much different but there is room to grow.

But the stock divergence in performance between the two cannot last for much longer. If the market remains bullish, look for the Russell 2000 to absorb the difference and start racing higher.

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